
Blue chip stocks enjoy a prestige value of sorts among investors. Owning some definitely packs value to a portfolio. But while being safe and steady, they may not entirely be exciting to speculative traders or risk-takers looking for high-growth in the short term. Here are some pros and cons.
Blue chip stocks, what are they?
Stocks of well-established, long-running, well-established and financially sound companies of repute that have over time, reported healthy operations and solid, dependable earnings are called blue chip stocks. Most blue chip stock companies are large-cap companies and in India, that would mean a company with a market capitalization of over Rs 20,000 crore. Generally, a blue chip stock is a market leader in the sector and the top few in terms of market capitalisation. These factors come together to make blue chip stocks popular among investors. The stocks over time, pay good dividends. Stocks like Reliance Industries, Tata Consultancy Services, HDFC Bank, Infosys, and so on fall in the category of blue chips in India.
Why are these stocks named ‘blue chip’?
Blue chip as a term to define top stocks has been derived from the game of poker. In poker, the blue chips are most valuable and considered higher than white and red chips. Similarly in stock terminology, blue chip stocks are considered of the highest value.
Are blue chip stocks good investment?
Blue chip stocks perform well over a long time. Their prices may not show a rapid increase. However, over a long time, the stock appreciates giving good returns to the investor. So clearly these are not stocks in which you can make quick money, however, at the same time, money invested in these stocks also stays in place because of the company’s well-established business.
Risk vs return
Blue chip stocks are typically low-risk, low-return stocks in the short term. So, if you have a financial plan and want to grow your money over a certain period of time, say five years, then blue chip stocks should only be considered as a slice of your investment. Your portfolio should have a variety of stocks to get you the financial result you desire – but parking some funds in a blue chip helps one create a stable portfolio as they have low risk in general. But only put in as much money as you can afford to invest and forget for a long time.
Are blue chip stocks entirely risk-free?
Blue chip companies usually are survivors of various market cycles and are considered safe investments because of certain immunity to fluctuations they may have shown over time. However, the case of Lehman Brothers and General Motors proved a fact that even the most reputed companies may fail to bear the stress of a volatile situation like a global recession. This drives home the point that even blue-chip stocks are exposed to risk, though much lower than other categories of stocks.
How can you invest in blue chip stocks?
You can individually buy blue chip stocks or invest indirectly through mutual funds and exchange-traded funds (ETFs) that invest in blue chips. Many funds have a significant portion invested in blue chips – these funds are more secure and an option for you if you are interested in slow steady growth over the long term.
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